Muni Credit News September 24, 2015

Joseph Krist

Municipal Credit Consultant


Mayor Rahm Emmanuel announced his proposed budget for fiscal year 2016 on Tuesday. It includes a record city property tax increase ($543 million), a Chicago Public Schools construction property tax increase ($45 million), a new garbage hauling fee ($62.7 million), Uber and cabdriver tax and fee hikes ($48.6 million), new electronic cigarette taxes ($1 million) and building permit fee increases ($13 million). The city property tax hike, to be phased in over four years, would go toward the police and fire pension fund. It would amount to an estimated 70-percent increase in the city’s levy. The mayor wants state lawmakers to pass a law to exempt private homes valued at less than $250,000. The CPS money goes to the school district. The rest of the money goes toward reducing the year-to-year operating deficit, also known as the structural deficit.

The sharp increase in payments to the pension funds has been looming over the City for some time. Now that the actual numbers required have been made public, the issue becomes a political one. The City Council has avoided these kinds of increases for a long as possible but it has become clear that the State’s own pension and  difficulties preclude any real current help from that source. Emmanuel will have to obtain the votes of 26 of the 51 council alderman. The property tax increase may actually be the least contentious item if the homestead exemption is allowed. The garbage fee will actually be politically more difficult.

According to the Mayor, cutting its way to find the money for increasing pension payments would cause the City to cut 2,500 police officers, or about 20 percent of the force. He also said 48 fire stations — about half the city’s total — would have to be shut down while laying off 2,000 firefighters, or 40 percent of the department. Even if he wins approval of all the tax hikes, Emanuel’s $7.8 billion budget proposal comes with a measure of risk. It counts on Republican Gov. Bruce Rauner not standing in the way of legislation, supported by the Democratic legislative leadership,  that gives Chicago more leeway on required increases in police and fire pension payments. If that bill is not enacted, the city could find itself $219 million in the hole next year. The uncertainty over the outlook for the proposed budget continues to pressure the City’s ratings and supports the continuing maintenance of the current negative ratings outlooks.


The Puerto Rico Electric Power Authority (PREPA) announced Saturday morning that it secured extensions on its forbearance agreements with the Ad Hoc Group through Oct. 1, and fuel-line lenders through Sept. 25. Although monoline bond insurers, the public corporation’s other main creditor constituency, are not parties to the extension agreements, they continue to engage in discussions with PREPA and other creditors, according to the utility. “We are making progress and will continue working toward a consensual resolution that benefits PREPA and all of its stakeholders,” said Lisa Donahue, PREPA chief restructuring officer.

Without an agreement with the monoline insurers ahead of the deadline, they are technically allowed to notify PREPA’s trustee of a default event, which would commence a 30-day cure period, or potentially face litigation. Supposedly, the utility believes it will not end up in litigation with its bond insurers, which along with the Ad Hoc Group and the fuel-line lenders are PREPA’s three main creditor constituencies.

PREPA’s fuel-line creditors, a group of banks, and the Ad Hoc Group, which holds about 35% of the utility’s $9 billion debt, were willing to grant the forbearance agreement extensions Friday. Monoline insurers continued to hold out. At the beginning of the month, MBIA Inc.’s National Public Finance Guarantee chose not to join the other forbearing creditors in granting the deadline extension.

Meanwhile, the preliminary agreement reached between the utility and the Ad Hoc Group is said to call for an exchange of uninsured bonds for new, securitized paper; a 15% haircut on principal; and a moratorium on principal payments for the next five years, among other items. National is exposed to approximately $1.4 billion on PREPA. The utility’s other monoline backers, Assured and Syncora, insured about $900 million and $170 million, respectively, according to Bloomberg. National has a total exposure of some $5 billion across the commonwealth.

The way this deal [with the Ad Hoc Group] is structured is said to be viewed as being punitive to National relative to Assured in that National has a lot of front-ended maturities. The cost to National is about twice what the cost is to Assured, even on an equal dollar basis. Even on something that they both have $100 worth of exposure to, the cost to National is about $30 and the cost to Assured is about $15 on a present value basis.  The commonwealth has hoped a PREPA workout could be a template  for creditors in the overall restructuring to come.

The utility still faces significant hurdles before it can successfully complete a consensual restructuring plan, among them securing participation of at least 75% of bondholders that have not previously been part of the yearlong restructuring talks. Also, legislation is required for many of the plan’s components — including approval for the debt-exchange procedure and changes to PREPA’s governance provisions.  Securing majority support from the Legislature has proven to be difficult at best in many instances for the García Padilla administration.


One of the best examples of a deal that could only be done in the muni market has always been bonds issued for the Santa Rosa Bay Bridge near Pensacola FL. The bridge was built in 1999 primarily to support real estate development on Santa Rosa Island on Florida’s Gulf Coast. “Bo’s Bridge” as it was known in the area, was driven primarily by support from its biggest backer, former House Speaker Bolley “Bo” Johnson. It remains a prime example of speculative investment backed by poor research by both the consultant and bond investor communities. Usage has never met projections and underutilization along with demand diminishing toll increases have combined to produce a facility which will likely never cover its debt service. Coverage shortfalls have characterized the credit since 2010.

The bridge is now back in the news with a move by the Trustee for the bonds to initiate litigation against the FL DOT. Representatives of Trustee’s counsel and a project consultant met with State Representative Doug Broxson (Santa Rosa) to discuss potential resolutions to the situation in November, 2014 and February, 2015. Neither of the meetings were successful. On March 16, 2015, the Trustee notified FDOT of the Authority’s noncompliance with the Bond Resolution, and demanded that FDOT immediately implement a toll schedule recommended by the project toll consultant. In May, 2015, FDOT’s general counsel sent a response r that posed numerous questions to the Trustee and also requested additional items that the Trustee will not be able to provide. These included a request for indemnification by the Trustee of FDOT from individual Bondholders’ claims that, following the requested adjustment to tolls, cause revenues to either decline or remain insufficient to timely pay debt service on the Bonds and to fully meet all other requirements of the Resolution. Trustee’s counsel responded to FDOT, reiterating that FDOT is contractually required to raise tolls, and requesting that FDOT raise the rates.

The Trustee has now notified bondholders that it is willing to file suit against FDOT provided it receives direction and satisfactory indemnity against the costs, expenses and liabilities, including attorneys’ fees and expenses from Bondholders that may be incurred as a result of such litigation. Bondholders representing not less than a majority in aggregate principal amount of the Bonds Outstanding would have to approve the litigation. Without Bondholder support, the Trustee is unwilling to file suit against FDOT given the costs of such litigation and the potential damage to Bondholders who are satisfied with the partial debt service payments currently being disbursed to Bondholders.

When the financing was done in 1996, it was clear that it had been structured so that all of the risk of shortfalls in use and revenues would be borne by the bondholders. Many investors felt that despite the lack of any guarantees, the State would ultimately step in and pay debt service. We do not see what has changed to make the State of Florida suddenly decide that it should take on responsibility for payment of the bonds.


The State Water Board will issue its first series of bonds under its SWIFT program. SWIFT finances the purchase of obligations from local water systems secured by either their general obligation or revenue pledge. Pledged revenue bonds would be secured by one year of reserves and required annual coverage. The Board has been funded with a $2 billion appropriation by the Texas legislature under voter approved constitutional changes. It differs from existing state revolving fund bonds in that there are no federal dollars involved in funding the pool of money available to be lent.

The program is designed to help local communities develop new water resources to meet growing water needs to support new development which is occurring at a rapid pace. The pooled nature of the borrowing and the high credit ratings obtained through the proposed structure are intended to achieve the lowest possible financing cost for the underlying borrowers.

The Board will make subsidized low interest loans, deferred interest loans, and financings accomplished through board ownership of projects which will then be sold back over long-term schedules to the underlying local agency. Loans may be substituted as appropriate.  The portfolio was structured and secured in such a way as to obtain a program rating of triple A. Those ratings have been obtained from Fitch and S&P.

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